During the preceding era of plenty, typified by record earnings and substantial distributable income to partners, law firms grew rapidly, with modest concern given to containing overhead.

In most firms there was plenty of cash to go around, and partners were satisfied with their firm’s gross revenue, profits and their net income.  However, during the last few months, the economic landscape has changed dramatically.

The financial picture for many law firms, especially those firms having a transactional practice, is different from a year ago.  Competition for the dollar is stronger.  The steady stream of premium fees from mergers and acquisitions and other profitable transactional deals dueling the expansion has dried up.

Client billings are off, cash flow has slowed and profits are down.  In many firms, partner compensation has been relatively flat.  The extra distributions that partners were accustomed to receiving in the last few years have not been made this year.

The economic euphoria resulting from clients’ demands has been replaced by concerns resulting from a contraction of new transactional business from existing and potential clients, overstaffing of professional and administrative personnel, higher overhead, excess office space, underused associates and unprofitable partners.

Firms should consider several strategies for surviving the downturn.

A Short Term Plan:

The complexities of life during a downturn, requires all law firms to engage in some type of strategic planning, at least for the next year or two.  This kind of planning may be described as the process in which a firm formulates its immediate goals and methods for achieving these objectives.

When properly conceived and carried out, the planning process will enable partners to reach a consensus about goals, identify qualitative and quantitative benchmarks, and develop an action plan that includes timetables and lawyer accountability for performance.  The process entails the following steps:

Survey partners.  The initial phase of this process calls for the managing partner or management/strategic planning committee to survey all or a representative number of partners to obtain their perceptions about internal and external developments that will influence the firm.  The issues usually addressed during this process include the following:

1. A reassessment of the firm’s objectives and current guiding principles;
2. Partner/associate relationships, i.e., the ratio of associates to partners, classes of partners and partners and associates, criteria for admission to partnership and communications among and between partners and associates.
3. Partner satisfaction with gross revenue and net profit, individual net income, hourly and billing expectations.
4. The firm’s resources and capabilities, its perceived strengths and weaknesses, reputation and position in the marketplace.
5. The willingness and ability of attorneys to sell legal services and cultivate new prospects within the firm’s current and potential market.

Analyze the firm’s competitive position. This analysis should highlight internal and external factors that affect the firm’s competitive position.

For example, the managing partner should focus on the firm’s perceived strengths and weaknesses, its competitive advantages and disadvantages, and anticipated changes in the partner complement as the results of retirement, withdrawal, etc. to determine the effects these changes will have on the existing and potential client base.

In addition, this analysis should assess the extent to which the present compensation plan encourages or discourages partners in performing those nonbillable activities that are required to be performed by the partners to achieve the firm’s short-term objectives.

Any factors that will affect the firm’s ability to attract and retain the required volume of profitable business, either favorably or unfavorably, must be considered.

Analyze the firm’s economic position.  The managing partner, assisted by the firm’s administrator, should identify and analyze the following trends for at least the last two or three years: fee revenue and expenses; gross fees per equity partner; gross fees per lawyer; expenses per lawyer; net income per partner; net income per lawyer; the aged inventory of unbilled time and accounts receivable; costs advanced; the number of billable and billed hours of partners, associates and paralegals; fee billing realization; fee collections realization; the average length of time from when billable time is recorded until the fees are collected, etc.  In addition, the analysis should include the fees collected from the firm’s top 15 or 20 clients, by the nature of the work performed.

While the essential fact gathering may be readily accomplished in-house, in some situations the firm may be better served by electing to retain the services of outside consultants knowledgeable about law firm management and economics to assist in the overall strategic planning process.

For example, the firm’s lawyers may be disgruntled as a result of management’s lack of firm leadership or lack of control over specific practice areas. 

Perhaps the firm has expanded too rapidly without due regard of the market.  Maybe the firm has overinvested in lawyer and administrative personnel, technology or facilities.

In such circumstances, the partners may be more willing to discuss their views and grievances with an objective outside who will retain the partners’ identity in confidence, avoiding a confrontation among members of the firm’s management.

The experienced law consultant can expedite the short-term planning process.  Familiarity with the economics and dynamics of law practice assists the consultant with interpreting partners’ responses in view of the firm’s financial and management information, procedures, economics and political trends.

Identify objectives and develop strategies.  The information obtained from partners during personal interviews and the analysis of the firm’s financial, management and client databases should enable the managing partner to formulate plans and strategies for presentation to the partners in each of the key areas that were highlighted during the analysis.

Increase marketing efforts.  A firm should not wait for an economic downturn before organizing and implementing practice development activities.  However, in anticipation of a downturn, a firm’s marketing activities should be intensified and coordinated by a partner who functions as a “marketing czar” or by a marketing committee, rather than implemented by partners in an ad hoc manner.

Partners should be accountable to the committee for their business development plans and efforts.  Personal marketing plans should be developed for attorneys who have demonstrated skills or the potential to generate new clients or to proliferate work from existing clients.

Variable hourly budgets of time devoted to business development activities by these attorneys should be recommended.  Their billable and marketing goals must be adjusted accordingly.

Selected partners and senior associates should be engaged to become active in at least one professional organization or activity.  Others may be encouraged to seek and fulfill appropriate speaking and writing opportunities with professional and business forums.

Partners and associates should become involved in at least one civic, charitable or community activity.  Members of the marketing committee should counsel lawyers in their selection of activities and proposed commitment of time.

The marketing committee should establish and implement an organized program for client development.  For example, one objective may be that one-third of the firm’s clients will use at least two of the firm’s services.

Selected partners should be designated to meet with clients having significant potential for additional profitable business, either through growth of their own operations or through their ability to refer business.