Law firms are no different from other businesses, we face boom and bust cycles in practice areas such as M&A and bankruptcy, and we also face the same economic cycles of demand as our clients.
But let’s not kid ourselves, lawyers and law firms have never been accused of sitting on the vanguard of business and management skills. We are less prepared than most businesses because we don’t have professional management teams constantly providing future forecasts.
It doesn’t take much to realize a recession is nearly inevitable. The Federal Reserve is trying to slow the economy, interest rates are rising, consumer debt is at an all-time high, and even the largest tech companies have begun to layoff workers.
In our own industry, the “stealth layoff” has returned as even the largest law firms have begun to cull the ranks of their partners (this is when law firms want to layoff attorneys, but don’t want to signal weakness).
I’ve been a corporate bankruptcy lawyer for more than 25 years and I’m about to enter my 5th economic downturn. I have advised businesses of all sizes, including multiple law firms, on how to survive and thrive under the coming storm. Sometimes firms find themselves with the wrong product mix (practice areas), sometimes they face existential attack from competitors, and sometimes they simply become too inflated and complacent and are ill prepared for the inevitable. According to nearly every economist, we will watch this story play out again over the next 12 months and too many law firms will not be prepared.
There Is Good News: We Run Simple and Flexible Businesses
Law firms as a whole, as compared to other industries, are well positioned to manage the coming recession. We run very simple businesses. We need not build, own, or manage factories. Our firms are not capital intensive, like manufacturing, commodities or transportation. We don’t face supply chain problems, and we are generally not a “luxury” product easily postponed or avoided by our clients.
In fact, our business models have a great many advantages in preparing for a recession. Our profit margins are high, we have the ability to grow and contract without the need to buy or sell expensive equipment, and we have the flexibility to quickly pivot toward (or away from) the type of work that our clients need.
Additionally, history tells us that the legal industry is somewhat recession proof. However, even though the “legal industry” will withstand a recession, that doesn’t mean individual practices or individual firms will be equally as immune. The legal industry is one of shifting workloads. During times of expansion, firms see work pour in and grow their practices in areas like M&A, corporate, tax, regulatory and even intellectual property. Yet much of that work can dry up in an economic downturn when lawyers see more bankruptcy, litigation and divorce work.
Modern economies have regular business cycles of sustained growth followed by inevitable recessions, then we repeat. Yet recessions are not all downside. They serve a critical role in regulating a market economy, but they can be an opportunity for law firms that are ready to capitalize on the moment. Savvy and entrepreneurial law firms can seize upon these opportunities to grow their market share, cut their costs and maintain (or even grow) their profit margins while the competition is scared, stagnant, and contracting.
In the coming weeks we’ll explore a number of practical, actionable steps to make sure your law firm is ready for the opportunity that lies ahead. In the meantime, if you’d like to learn more you can download a copy of our Recession Proofing Your Law Firm Guide.