A Recession Coping Guide for Canadian Law Firms
By Janice Mucalov, LL.B., April 2009
The legal profession is feeling the effects of the economic downturn, but there are steps you can take to lessen the impact. From renegotiating what you pay for office supplies to reevaluating compensation, here are the top 10 tips for survival, including a checklist for your firm.
- Cut Costs
- Get Close to Clients
- Monitor Financial Records Closely
- Keep Up Morale
- Branch Out into Profitable Practice Areas
- Lay Off with Care
- Invest in Technology
- Get Creative with Fees
- Think Long-Term
- Consider Compensation
There’s no doubt that the downturn in the economy has hurt the legal profession.
South of the border, a record number of law firms have collapsed – 18 failures last year and 22 in 2007. Nearly half of U.S. firms have fired associates and staff, while a quarter have clipped their partnership ranks. Almost 80 per cent of American lawyers believe that “everyone” in the profession will be affected in some way.
Canadian firms seem to be in a better position to ride out the recession than their U.S. counterparts. But most firms are still feeling the pinch – less demand for legal services, greater difficulty collecting unpaid legal bills, and losing clients because of mergers, acquisitions and bankruptcy.
The slump could last for another two years or more. What can you do to get through to the other side?
“There is no secret formula,” admits Tom Kane, a former practising lawyer and principal of the Florida-based legal marketing consulting firm Kane Consulting, Inc. “The best way to recession-proof your law firm is to do the things you should have been doing before the recession, just more of it.”
Still, there are several strategies that can help, say Kane and other legal consulting experts. Here are 10 top tips for surviving this tough patch.
The most immediate thing you can do now is ask, “Where can we cut costs?” advises Robert Millard, a partner with the law firm management consulting firm of Edge International.
Ask yourself, “What would be the consequences if we don’t spend this money?” If the consequences are palatable, then don’t spend the money, says Millard. That might mean saying “no” to hiring a lateral (where you typically only break even after six months).
Cost-cutting should be strategic – you want to preserve expenditures that are important for the overall vitality of the firm.
Continue to support practice needs like paying for staff bus passes and perks necessary to keep up morale. And don’t make small meaningless cuts like doing away with free muffins on Fridays when it would be more sensible to eliminate unnecessary and costlier travel expenses.
But maybe axe the lavish Christmas party. Find creative ways to manage costs while maintaining the social bonds and goodwill often built through office functions, advises Karen MacKay, principal of Phoenix Legal, a Toronto consulting firm. “This might be the year for a good old-fashioned summer picnic in the park.”
Review contracts with suppliers to make sure you’re getting the best prices. “The legal profession is likely to be charged more than other industries,” says Mike Short, a law firm consultant and vice-president at Hildebrandt International. Because margins are typically higher for law firms, you should be able to renegotiate your contracts for office supplies, back office support, computer systems and software licences. Short expects you could save up to 30 per cent or more on your existing agreements.
Also try renegotiating your lease.
Vendors, landlords and others may be willing to cut their prices and rental payments if the alternative is for your firm to go out of business.
Where else can you save?
Do you have space you could rent out? What about saving money by outsourcing some of your services?
Now is the time to really cozy up to clients and have a true dialogue with them. Many lawyers think that clients don’t want to talk about their difficulties in tough times. Not true. You are in the relationship business; contact with your clients is the most important part of your professional services. Remember that a client who is a friend – or at least one with whom you share a close relationship – is one less likely to leave.
Find out how you can help and serve your clients better. You might discover that your client is laying off employees and needs more labour and employment counsel.
Intensify your marketing efforts
Don’t scale back on your marketing budget. It’s tempting to view marketing as a discretionary expense, not an investment. But that’s a mistake, contends Kane.
If anything, “crank up your marketing,” he advocates. “While others are cutting back, there will be less marketing ‘noise’ out in the marketplace and more chances to be noticed and beat the competition.”
How much should you spend on marketing? An oft-quoted figure for law firm budgets is one per cent to two per cent, though some firms are now spending three per cent of their gross revenues on marketing.
But the proper approach is to decide what you want to accomplish, then decide what to spend – not to say, “We’ll allocate two per cent to marketing.”
Focus on existing clients
It’s less expensive to market to current clients than it is to acquire new ones. Concentrate your efforts on satisfying existing clients, who are often a source of new client referrals.
Visit clients at their workplace
“The single most effective marketing technique, which leads to immediate business in the vast majority of cases, is to visit your client at their place of business,” declares Kane. Obviously, this is most applicable to regular corporate clients, but the idea of showing that you care by meeting with wills/estates or other clients at their home is the same.
“The visit is not for the purpose of discussing a current matter you may be working on,” adds Kane. Your purpose is to listen to any concerns your client might have, learn about their business and day-to-day problems, meet others, and generally strengthen the relationship you have. And the client should know you are not billing them for this visit.
Target your best clients
Some 50 per cent to 80 per cent of revenue is usually generated by a firm’s top clients. Stay in especially close touch with these clients.
Susan Van Dyke, a Vancouver legal marketing and communications consultant, suggests targeting your top 10 clients and establishing a small working group for each of them. Then invite your clients’ executive teams over for non-billable, quarterly lunch meetings to discuss new matters and hash out any concerns with their working group.
Asking for Feedback
Questions to ask include:
- How did we do (on a particular file)?
- How do you value our services?
- What do you need from us?
- How can we serve you better?
- Are our lawyers responsive?
- Is our billing process friendly?
- Is there anything else we should ask that we haven’t asked?
Asking for feedback is also key to connecting with clients. Face-to-face interviewing is preferred over written questionnaires, which have limited value in Kane’s experience. Just make sure you don’t “come across under the guise of seeking client comments as actually making a sales pitch for more work, which would totally deplete the goodwill that you’re trying to build,” he cautions.
Clients are less likely to be candid with the lawyer they regularly work with. Kane suggests you allocate the job of obtaining feedback to the managing partner, department head or, better yet, a dedicated client relations partner or staff person skilled in interviewing techniques.
When should you ask for feedback? A good time is at the end of a client matter and on an annual basis.
Clients will be impressed that you are taking the time to call them and ask for their opinions. Seeking feedback often leads to more work (even though that’s not the goal).
It’s critical your cash flow is managed properly in a down economy. Keep a vigilant eye on items like your receivables, work-in-progress and write-offs to prevent nasty surprises.
Boost the frequency of your financial reporting
“Some firms are putting together rolling forecasts every three to six months, so they are doing a yearly forecast every quarter or so, as opposed to just once a year,” says Millard. With more frequent reports, your firm can respond faster if there’s a revenue drop in the picture.
Stay on top of collections
Don’t wait until year-end to follow up on outstanding bills – collect early. A bill that is 60 days overdue can still be collected about 89 per cent of the time. But after six months, you only have a 67 per cent chance of collecting, and only a 45 per cent chance after a year.
For cash-strapped clients, consider alternative payment solutions like:
- Inviting payment by credit card
- Arranging a payment schedule
- Shaving off a portion of the bill if paid within a specified time
- Taking security on deferred fees
Carefully vet new clients
“You should be doing credit checks on new clients, especially where it would make a substantial difference if the client doesn’t pay their invoices,” recommends Millard. “If no credit is available, then ask for a retainer up front.”
Postpone bill payments
If your firm becomes squeezed for cash, see if suppliers will give you a grace period. Perhaps you can pay in 45 days instead of 30.
Consider your firm’s business model
Ask yourself if your firm could endure another 10 per cent drop in revenues. “If the brutal reality is that you couldn’t survive, then start looking around at merger opportunities with another law firm,” says Millard. Consider firms with lucrative complementary practice areas.
As hard as the process may be, by combining two struggling firms, you may create one more profitable and resilient law firm. With a merger, you can shed undesirable practice areas and also redundant expenses (e.g., you’ll now only need one office manager, one office and probably less total space, etc.).
Feeling uncertain is inevitable. But rumours, job anxiety and money worries can impair productivity. Reassure your lawyers that you are doing everything prudently possible to lead the firm through this recession.
Remind people how your firm weathered the last downturn – provide statistics and examples.
Communicate often with everyone in the firm. Explain the measures you are taking to keep the firm strong and the financial implications of these steps. Tell people if they are not going to be dismissed.
While the flagging economy has affected many practice areas and client sectors, others are flourishing. It may be easier for larger firms with a wide cross-section of practices and clients to withstand the effects of the economic slowdown. But if a sluggish practice area is dragging your firm down, consider diversifying.
Thriving practice areas
Corporate work, in particular, is suffering. Mergers and acquisitions, private equity work, regulatory proceedings, public offerings and major transactions are all down.
On the other hand, several practice areas have spiked, including:
- Litigation, particularly personal injury/health care claims and real estate matters
- Bankruptcy, insolvency and restructuring
- Intellectual property
- Contract, labour and employment disputes
It may be worth developing expertise in these areas.
Family law could see an uptick too – divorces and matrimonial claims are expected to rise as families buckle under financial pressures. Estate planning also tends to be recession-proof.
Prosperous client industries
Opportunities exist to target new clients in booming (or at least stable) industries.
“Look at infrastructure work,” suggests MacKay. “The government is throwing money at stimulus and infrastructure – those ‘shovel ready’ projects are a focus, so look at where the government is investing.”
Examine the economic forecasts for specific market sectors to see if they offer good prospects for work, adds Van Dyke. “Consider fast food franchises or discount consumer goods retailers as good prospects, just to name a couple of recession-proof industries.”
Some firms are using the current downturn to get rid of chronically under-performing lawyers. But you really should be rigorous about performance on an ongoing basis, not just when the economy is poor.
Still, now is as good a time as any to “right-size” your firm. “If it’s just money that keeps your firm together, then cut off under-performers,” says Short. “But if your culture is different, you may want to carry people.”
Also, as Millard notes, if you ump too many associates, you risk ending up with a gaping hole that will be hard to fill when the economy recovers. You’ve invested considerable time, effort and money in hiring and training your associates, so it’s worth holding on to them if you possibly can.
How to Gently Let Go
Be very careful if you decide to terminate any of your lawyers. “How you treat people on the way out tells everything about your firm’s values and culture,” cautions MacKay. “Drastic and poorly handled downsizing can impact future recruiting for years. That folklore stays around for a long time.”
Let firm members know that you’ll tell them if they are going to be dismissed. Lay off everyone at the same time, so the firm can get over this and move on. And treat those you let go fairly and professionally.
Instead of letting someone go, consider a secondment. Can you move a younger, under-used lawyer over to work with a client for two or three days a week, and share the associate’s salary?
Creative partnering with clients doesn’t have to involve just junior lawyers. “There are entrepreneurial businesses created by younger people who could benefit from the wisdom of mature lawyers,” says MacKay. “Or perhaps a senior lawyer or partner can donate 200 hours a year working with one of your non-profit clients.”
In smaller firms, in particular, open up a frank discussion. “There may be an associate willing to work four days a week, who in previous years was afraid of the stigma of working an alternative schedule,” adds MacKay.
Money-saving alternatives to layoffs:
- Taking an unpaid leave or sabbatical
- Taking every second Friday off unpaid
- Working reduced hours
It may seem counter-intuitive to increase spending when money is tight. But like marketing, technology is an area where an investment can pay off. If you can use technology to deliver legal services better and faster – and pass on the cost-savings to clients – your clients will reward you with their business and loyalty.
What's a Wiki?
One of the most promising technologies for knowledge management is the “wiki,” says Doug Cornelius, a tech guru and former senior lawyer at Goodwin Procter in the U.S.
A wiki is a collection of webpages that allows visitors to share knowledge and edit content (Wikipedia is the most famous example). When a wiki page is saved, subscribers are notified of the changes. A wiki can be limited to members of your firm or opened up to a wider subscriber base.
Why wiki? The main reasons are:
- Simplified work flow (reducing the number of steps involved to arrive at the final document)
- Better search ability and easier to find information quickly
Tech-savvy law firms are using wikis to create best practices and procedures manuals, detail meeting agendas, collect and coordinate case facts, manage client transactions and co-author legal papers.
Unbundle your services. Create new precedents. Package a suite of legal products.
Save time and money by adopting technological advances like teleconferences rather than travelling for face-to-face meetings.
Hire a consultant
“In many firms, technology is an area where there can be tremendous waste if you don’t understand it,” MacKay says. “Particularly in a small firm, it can be very valuable to have an outside tech consultant/expert look at your systems to see where you can save money.”
Integrate affordable technologies
Some new technologies (like wiki platforms) cost very little or nothing. Any technologies you learn to use that ultimately save you time will help your bottom line.
Abandon billing by the hour
Corporate clients are asking lawyers to provide legal budgets. “They want predictability,” says MacKay. “If you’ve done three private equity transactions in the past year, you should be able to propose a reasonable flat fee, with room to negotiate if the file takes a whole new track.”
Flat fees work for litigation matters too. Elite litigator Evan Chesler, managing partner of New York’s Cravath, Swaine & Moore, recently announced he is no longer charging by the hour. Instead, clients are charged flat fees, with “success fees” for positive outcomes.
Because they can be more flexible, solo and small firms have the advantage over larger firms in their ability to innovate and offer non-hourly billing alternatives. But all firms should aim for flat fees (which many predict will be standard in future).
Look back over your bills, comparing files, to come up with feasible flat fees for different scenarios. Or for a litigation matter, perhaps you can charge an initial flat fee to evaluate the case and prepare the pleadings, followed by a contingency fee dependent on the outcome.
Cut rates or increase fees?
Despite pressure from clients for reduced fees, most experts agree this is not the time to decrease billing rates across the board. However, as you may want to help and retain your best clients, you could freeze rates for them for the next year or so.
Talk to your clients and involve them in solutions. “Maybe you don’t charge your hourly rate for travel from Toronto to Mississauga for meetings this year,” suggests MacKay.
Beware of increasing your fees. “How can you raise your rates when clients are cutting their fees and prices?” notes Millard. But feel free to push up fees for your less profitable clients – it’s not important if you lose them as a result.
It’s easy to lose sight of the future when you’re focused on immediate survival. But it’s important to engage in long-term planning too.
What do you want your firm to look like when this recession is over?
Do you like your clients and the type of legal work you do? If so, do more of what you’re currently doing. If not, start positioning yourself now to have the kind of practice you want to end up with.
Think also about what the market will look like. Experts predict that once we’re in a period of positive growth, demand by empowered clients for legal outsourcing, commoditized legal products, web advice and technological applications to deliver faster, cheaper and better services will be enormous. Will your firm be ready?
Salaries and compensation account for almost 80 per cent of a law firm’s costs. Reduced associate and partner compensation may be an inevitable consequence of poor firm performance, whether planned or not. But with people expenditures (including partner compensation) consuming such a huge chunk of a firm’s costs, proactively deciding to prune back compensation could be wise.
One could argue that partner compensation should be seriously reviewed before automatically moving to cut associates’ pay. It would be a definite morale-booster and a strong recruitment signal to the marketplace if partners showed a willingness to share the pain, rather than making everyone else bear the whole burden.
By leaving partner compensation off the table, you could jeopardize the firm by having to slash marketing and professional development, lay off good associates and defer important technological upgrades. In short, it’s important to consider all possible cost-cutting measures in the face of an economic downturn.
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ABA Economic Recovery Resources
“Recession-Proof Your Practice” by Susan Berson, ABA Journal, January 2009
“Surviving the Slide,” LawPRO, Fall 2008
“Weather the Storm” by Gerry Riskin and Robert Millard, National, April-May, 2008.
Tom Kane’s Legal Marketing Blog
“Wiki While You Work” by Doug Cornelius for the International Legal Technology Association, June 2008