Would a recession be legal?

Published on: 
04/21/2008
Published on 4/21/08

In the legal profession, things can change in a hurry.

Not long ago, million-dollar profits per partner and starting associate salaries of $160,000 were the talk of the legal world. Now, with recession stories in the news daily, law firm consultant Hildebrandt International (along with Citibank) put out a report warning firms of "a 'perfect storm' in which finance, transactional and litigation work have all trended downward at the same time, with no offsetting surge in work related to the economic downturn itself."

Law firms are no strangers to the boom-and-bust cycle, and the Hildebrandt report points out that the recent good times spawned practices at larger firms that now could come back to haunt them:

  • High associate salaries and the de-equitization of partners have made leverage more expensive;

  • Clients are pushing back against rising hourly rates, using everything from RFP "beauty contests" to demands for fixed fees;

  • Mergers, pursuit of laterals and frenzied law school recruiting have given many firms high headcounts just as demand for legal services is turning soft.

Of course, small firms and solo practices face the valley of lean times frequently, sometimes more than once a year. Every firm needs a survival strategy; in this column several months ago, I suggested a key one: Establish and maintain a good relationship with your banker so you can get cash if you need it. Other tactics are just as important to survive a business slowdown, and here are four that are practical steps for firms of any size:

  1. Emphasize collections. If clients are facing hard times, paying their lawyer 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 reaches six months outstanding.

  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 larger facilities, more technology or additional staffing. If receivables don't get received, the firm cannot afford to pay staff or lawyer bonuses. But be cautious about downsizing. You should preserve your core strengths to take advantage of the economic recovery that will eventually come.

  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. Consult a coach. A business downturn is a scary thing to face alone. A coach who has been through the business cycle several times can often help you assess where your firm stands and what you need to do to stay competitive.

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