How one local law firm has reacted to our economic environment
“Daddy, what is a re-sezz-ee-un?” This is, without a doubt, the most profound question ever posed by my four-year-old daughter at the dinner table. A child’s naïve innocence would seem to hinder any true cognizance of an economic recession, so I assumed my daughter overheard the buzzword during a conversation between Mommy and Daddy. Nevertheless, I thought long and hard about my answer, hoping I might prompt our small child toward her first lesson in microeconomics. “It is a time when most people don’t have as much money or as many things as they normally do. They must learn to spend less and live with less.” She smiled back at me, as if she understood. “It’s a good thing Santa Claus doesn’t have a re-sezz-ee-un,” she responded. Ahh, the mind of a child. If only it were as easy for the rest of us.
The Beginning
I should begin by admitting that our law firm has been fortunate. During a recession, banks need their lawyers more than ever, and our law firm represents banks. As a result, we have maintained a steady client base and workload during these volatile economic times. Nevertheless, companies throughout Illinois, including ours, have been forced to make adjustments. Indeed, during dire economic times, all service-oriented businesses need to make difficult decisions to sustain a positive cash flow and ensure the survival of the company. Efforts must be undertaken to forecast both short- and long-term changes to survive the economic crisis and continue as a strong enterprise. Perhaps most importantly, business models must be reshaped and revitalized to position the company to compete in the resulting market after economic recovery.
As the economy began to falter a couple of years ago, we learned that merely maintaining a steady client base and workload does not circumvent the need for adjustments. Accounts receivable and collection periods tend to increase, resulting in a corresponding cash decrease. Larger clients utilize their leverage to seek tighter budgets. Collecting the final invoice payment on a matter becomes troublesome. Collecting anything after losing at trial becomes virtually impossible. As all of this began to unfold, I recalled a warning I received from one of our banking clients. “The economy is entering a crisis,” he kept telling me, “and I hope you’re ready for what lies ahead.”
A crisis did indeed arrive, and we noticed that the creation of new businesses started to slow. Corporate clients began cutting costs, and their budgets for outside legal assistance were being decreased, if not completely eliminated. For our firm, some aspects of our business slowed dramatically, but fortunately, the increase in banking work made up for the loss. About this time, I began reading legal periodicals to learn how other law firms were reacting to the changing climate. It seemed that many were beginning to downsize, much like businesses in other industries.
One day, I came across an article in American Lawyer magazine that predicted a major crisis in our nation’s law firms, due primarily to an archaic business model that cannot be sustained. A column in the Illinois Bar Journal later mirrored these same conclusions for Illinois firms. Soon after, these predictions started showing early signs of manifestation. Historically strong law firms everywhere began to operate at a loss. Some reacted by freezing salaries and laying off attorneys. Others closed all together, leaving their clients and creditors in disarray. Most authorities observing the legal industry have reached the same resolution: the traditional business model for law firms is broken. After analyzing industry data for several months, we agreed and concluded it was time for change.
The Middle
Eighteen months of strategic planning led us to agree that the traditional law firm’s business model would not allow us to compete into the future. Indeed, the very backbone of a law firm’s gross revenue, the “billable hour,” is being scrutinized extensively by corporate clients on a widespread level. This system will not accommodate the new, evolving client base that is surfacing as our next generation of entrepreneurs.
The “Generation Y” leaders of tomorrow will expect efficiency and cost-effectiveness like never before. It is clear they are not interested in a firm’s billable hourly rate; rather, they want a proposed detailed budget from start to finish on each individual file. Over 5,000 new young attorneys have joined the workforce in Illinois over the past two years, at a time when very few firms are hiring. Combine them with the hundreds of good young lawyers in this state who have been “outsourced,” and we have an army of creative, logical thinkers working every day toward establishing a new system in which they can compete. To ignore them would be a mistake, because today’s entrepreneurs intend to utilize them to drive down legal costs. It follows that the only alternative is to understand and embrace them as competition, and learn to coexist. The following is a summary of a few of the major strategies that we deemed essential to our business plan in order to compete in the future.
First and foremost, a law firm provides services, and no business plan in any service industry can succeed if the services provided are inferior. There must be a profound and consistent level of success achieved so that a reputation and track record for achievement and integrity can be established. To be a leader in a service industry, one rule has become axiomatic: we are only as good as our weakest link. So, as a small business owner, I must hire a workforce better than myself to perpetually improve and remain competitive.
Second, every business plan must carefully select its principal location. Like many other industries, the legal world is migrating toward a virtual and digital universe. Being located downtown and across from the local courthouse is no longer as important as it once was. Variable costs and fixed overhead, of course, must be primary concerns. However, a more visible location with built-in marketing and convenient access for clients can separate the established firm from competing virtual attorneys. Clients still seem to put a premium on quick, efficient access to their service providers.
Similarly, we must accept that the world of organized virtual lawyers is expanding exponentially. They network with each other and market themselves with the stroke of a keyboard. To compete with them, law firms must be prepared to similarly branch out and offer clients a broad range of services. When the services needed cannot be provided from within a firm’s own walls, it must be prepared to refer the matter within a compatible network of “friendly” competitors in the same community.
Fourth, even the most conservative and traditional law firms now realize that marketing and advertising have become necessary to survive. The days in which lawyers could enjoy a zero overhead budget for advertising are gone. How, where and in what manner a law firm should market itself is still open to debate. Nevertheless, if a target client does not know you exist, it is a given that the client will not hire you.
Finally, and perhaps most importantly, lawyers must participate faithfully in their community and network through meaningful involvement with civic organizations. Not only is this a wonderful way to give back to our community, but the philanthropic bonds formed present the best way to separate ourselves from today’s anonymous virtual service providers. Simply stated, a lawyer sitting in Rapid City, South Dakota might be able to provide a local business with written documents online for a cheaper price, but that lawyer will not be able to sit next to the business’ owner at a charitable fundraiser and share ideas about how those documents can help create jobs and improve the community.
The End?
Someday, when Jocelyn is older, I will remind her of our discussion about this recession. I will share with her my story about how our law firm chose to adapt and react to the economic crisis we faced. Hopefully, by then the changes in our business plan will have culminated in some success. Hopefully, this story will have a happy ending. iBi
