Back to top
Article

Navigating the perfect storm

20 October 08

The current financial climate is no ordinary recession, and in order to survive, a law firm needs to be clear about its business model and its means of achieving it

by Malcolm Mackay

The “perfect storm” is upon us. I still hear suggestions this is simply another recession and that lawyers need only cut costs to ride out the turbulence. I do not subscribe to that view. For the legal profession, the credit crunch is just one destructive wave in a storm that’s been brewing for decades. Our industry has been under pressure for a variety of reasons, and when the storm subsides, many of the inefficiencies that have been masked by a rising market will be laid bare. We have to recognise that while the financial markets have been in turmoil, and banks and insurance companies damaged in the process, other factors mean our profession will suffer serious pain. It is happening now and affecting law firms at all levels.

As service providers we depend on the needs of the front-line economy. The credit crunch means businesses will insist on legal budgets being cut and consumers will shop around even more before buying legal services. Both will become more reliant on the internet to do research and prices will remain under pressure, particularly for services perceived as commodities. Unfortunately, clients’ expectations have been changing for some time and the traditional law firm model is no longer suited to meeting their full range of needs. The heavy reliance of the Scottish economy on the public sector will do nothing to kick start growth.

This is the environment in which Scottish law firms are operating, and it is clear that standing still is not an option. However, with any period of change, opportunities arise. The successful law firms or legal service companies of the future will be those that recognise them, and act upon them. Those that are prepared to take the pain and adapt. So how do you maintain a profitable business in these conditions?

Finding true north

The natural inclination in a threatening situation is to focus all efforts on reducing costs. Though comforting in the short term, this leaves a vacuum that needs to be filled by a plan. I recommend partners first take time to establish a true sense of direction for their law firm in the medium to longer term. Whilst certain goals may have to change in response to choppy waters, if you’re clear where you’re heading for ultimately, you’ll have a better chance of staying on course. This means developing, or re-assessing, a clear vision of what you want your firm to be: local/regional/national/ international, niche/multi-disciplinary,… etc.

This thinking should include the factors impacting on clients’ changing expectations and needs. Partners should also consider the impact of market conditions on legal services providers. Some firms will go out of business; some will consolidate and acquire others. The consolidators will be the firms with strong leadership and a vision for the future. Use a vision to work backwards from, then establish milestones for the journey ahead.

Law firms are unnatural long term planners; the transactional nature of their client work and, until now, the relatively stable nature of their operating environment, are contributing factors. Often an overriding emphasis on one-year planning prevails, in order to deliver the financial aspirations of partners. This is fine when business is coming in, but not so good when it has to be fought for.

Now is the time to address voices that dissent from a vision. A firm that has a clearly stated goal, along with a strategy to deliver it, will always have a competitive advantage in a market that depends upon people to deliver a service. The best law firms have always recognised that the priority has to be to understand your clients and potential clients, and to focus on their needs. How many law firms can you name that really demonstrate these qualities?

Mapping the route

With fewer clients spending less, it’s important to strengthen your position and be seen as the “go to” firm. One of the simplest planning tools is the SWOT (strengths/weaknesses/ opportunities/threats) analysis. Look carefully at your firm’s strengths and be honest about what you are best at. Consider whether you should specialise more. Most, but not all, industry sectors will be experiencing less activity. Seek out those that are continuing to grow despite the downturn, such as the energy sector, and see where you can match the two.

Consider addressing some of the shortcomings of the traditional law firm in clients’ eyes: the lack of cost certainty created by the hourly fee, the lack of access some clients experience relative to their own operating hours. You may need to consider an alternative business structure such as a limited company to solve and exploit these. From personal experience starting Law At Work, I know this route can both help to crystallise a more tailored client solution, and clarify the marketing plan for traditional law activity.

Having decided on a plan, get on with implementing it. Vision and strategy without delivery amount to nothing. Lawyers are used to giving opinions, not making decisions; we tend to avoid uncomfortable truths or suffer “analysis paralysis” when it comes to new opportunities. However, times are such that we need to behave like other businesses, and this means taking some risks. Now is the time to dust off any projects passed over for lack of ambition, or seek help from facilitators. Some firms may have to reinvent themselves to survive.

It helps to look at examples from other industries, even if different in scale (IBM consulting). International markets can also offer insights into new approaches. I have sat in partnership meetings around the world, and while issues are similar, the responses vary. Investigate the biggest law firm/client online collaboration initiative – www.legalonramp.com – sponsored by the heaviest corporate legal spenders. Here you’ll find daily blogs on “value pricing” or internet marketing.

Allocating provisions

This sounds like a lot of time or money but it needn’t be. A balance is needed; costs need to be cut to keep pace with competition, but the sagest business people also invest, even a little, on a down cycle. This is important not just to give your firm a different growth opportunity, but to raise staff morale and show clients you remain focused on the future. Whatever savings your efficiency programme produces, consider spending 10% on a new project and look for opportunities to redirect resources.

Before concluding that redundancies and/or reduced hours for staff are needed to deal with falling earnings, consider whether roles can be adapted. Some lawyers may be better deployed on developing new specialisms. Others may be happy to take time out to develop experience elsewhere, returning when the market improves. Perhaps one of your lawyers is that entrepreneur who can develop new angles on the business. Look for a natural project manager within the team.

There has never been a better time to save costs by using low cost technology. This can free up staff to spend more time with clients and to market the firm’s services. For example, voice recognition software has transformed in recent years. I use it all the time and find it virtually 100% accurate. It is fast and saves having to check documents that have been dictated to someone else. A secretary freed from typing can contribute to a firm’s recovery by playing a more client facing role or carrying out market research. There are many communications solutions out there; Skype is the most widely used cost saver for internet phone calls but I have come across a more business-focused audio/video conferencing service – www.digitalsamba.com (offers free trial).

Take a good look at what services can be outsourced. This could involve sub-contracting certain legal services to other law firms that operate from a lower cost base, or have a higher degree of specialisation, and can deliver a more efficient service. Notwithstanding competitive considerations, firms should explore ways that they can share overhead – property, support staff – to reduce costs.

One of the deficiencies of the partnership model is that it is difficult to realise capital value. In the current market it is more or less impossible. Merging with another firm, however, may be the right thing to do – but not if it is just a short term cost sharing exercise. Merge if you have a strategy for the future and the merger assists you in delivering it. Merging in itself can be an expensive and time consuming process, and in the short term is likely to result in an increase in expenditure. If done for the wrong reasons, cracks will appear later.

Promoting the venture

Communicating your new direction, externally and internally, will be important. Law firms are one of the few businesses that expect their employees to combine sales, fulfilment and billing roles; most others separate these. It will be important to be more visible and in touch with existing and prospective clients than ever before. Selling professional services is a skill set in its own right; consider getting help with this directly, or indirectly, by training key employees. Inside your firm, lead from the front; in times of crisis more than ever, people of all ranks need inspiration.

Alternative routes

If it is too hard to address realities you may have to consider getting out. However, I urge you to look first at your business anew, and see if you can picture it as a next generation law firm. Another option is to consider going in-house. The percentage of in-house lawyers compared to those in the profession overall is bound to increase if, following the US experience, large clients find it cheaper to employ their own counsel than pay by the hour.

The only reality is change, and the firms that will survive and prosper will do so by adapting their thinking, services, billing structures and business model around clients’ changing needs. A business in the services sector should have little need for capital investment. Unlike another sector I could name, let’s stick to core business principles and remember that delivering a high quality service that fulfils the client needs, and is reasonably priced, will always work. Look forward not back, and remember that destiny doesn’t pay home visits.

 

Malcolm Mackay is founder of the Law At Work Group and a strategy consultant to law firms.

 

Have your say